It can be tricky to try to catch a bottom in a fallen stock. Catching a knife isn’t without its fair share of risks. But, then again, performance chasing can also be a high-risk proposition once the tides do turn. If the technical picture looks right, the price of admission entails a deep discount to intrinsic value (or your estimate of it), the fundamentals are still strong, and investors just love to hate a certain name, you might have a timely opportunity to go against the grain.
Just be patient and don’t expect a comeback to happen immediately after you’ve hit the buy button. Deep value investors know that it can take months, even quarters, or more than a year for a turnaround plan to finally work its way into a stock.
Strategic turnarounds take time, and investors should adopt more of a long-term horizon when it comes to the stocks that have fallen by so much that nobody else seems nearly as willing to want to own them, despite any positive changes that have gone on behind the scenes. Indeed, pay extra attention to the conference calls and any signs of earnings progress as a firm under pressure looks to find the means to bottom out and start marching higher again.
Spin Master
In this piece, we’ll look at a ridiculously oversold mid-cap name with a $1.8 billion market cap that might be a worthwhile value option for those with strong enough stomachs. Enter shares of toymaker Spin Master (TSX: TOY), which have been in a whirlwind of pain in recent years.
The stock is down close to 68% from its highs, not seen since the first half of 2018. Indeed, that was a long time ago, and there have been some very painful spills along the way.
With shares continuing to gravitate lower with no signs the name can hang onto any near-term moves higher, questions linger as to whether or not Spin Master’s problems are fixable. Of course, you simply cannot fault the company itself for the performance, especially considering the state of the industry, the impact of external factors (think tariffs), higher energy (and transport) costs and all the sort.
A lot has gone wrong, but that negativity has already worked its way into the valuation. And, in my humble opinion, I think the stock is now oversold enough to consider interesting for investors seeking deep value. Of course, the name is rather untimely and could continue to be for some time. Sales have not been on the right track.
Though it’s hard to know when consumers will have more discretionary income to start buying Spin’s toys again, I do think that the firm could realize margin gains as it licenses its impressive brands (think PAW Patrol) while investing in digital games. Add the robust portfolio and M&A potential, and I’m inclined to view Spin Master stock as trading at a huge discount.
Bottom line
Sure, the consumer is under pressure, but when the tides turn, I’d look for TOY to make up for lost time as its prior investments look to start really paying off. In short, TOY stock is priced as though nothing can go right. At 10.5 times forward price-to-earnings (P/E), the name is just way too cheap to ignore, especially as management does its best to right the ship, even against industry headwinds.
